Citigroup blasts Nasdaq’s compensation plans for Facebook glitch

In a letter sent to SEC, Citi said Nasdaq’s role in the Facebook IPO amounted to gross negligence

Citigroup has slammed Nasdaq’s $62 million (£39.2 million) compensation plans for market making firms that lost hundreds of millions of dollars during the botched Facebook initial public offering on 18th May.

In a letter sent to the US Securities and Exchange Commission, seen by Reuters, Citi said that Nasdaq’s actions amounted to ‘gross negligence’.

The IPO was riddled with technical problems, which led to a delay of 30 minutes on share trades being processed. The problem stemmed from Nasdaq’s IPO Cross - a pre-IPO auction process that the exchange put in place in 2006 that allows traders to place orders and agree on an IPO price before the stock is officially launched - which couldn’t handle the trading demand.

Citi said that the exchange, which has a minimal amount of regulatory duties and technically only has a liabilities cap of $3 million (£1.9 million) a month, should not have immunity from compensating for all losses, which are estimated to exceed $500 million (£316 million).

The letter said: “Nasdaq cannot cloak its actions in immunity because it was acting exclusively as a for-profit business, and not as a market regulator, when it made the grossly negligent business decisions that caused market participants hundreds of millions of dollars in losses.”

This isn’t the first market making firm to lambast Nasdaq for its role in the IPO, after it was revealed that UBS lost £227 million as a result of the glitch and intends to sue the exchange for full losses of what it described as a “gross mishandling of Facebook’s market debut.”

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UBS said: “UBS' loss resulted from NASDAQ's multiple failures to carry out its obligations, including both opening the Facebook stock for trading and not halting trading in the stock during the day. We will take appropriate legal action against NASDAQ to address its gross mishandling of the offering and its substantial failures to perform its duties.”

Nasdaq originally revealed that it had earmarked $13.7 million (£8.8 million) for compensation, but later said that it would add to its $13.7 million compensation by offering brokerages reduced trading costs, to bring compensation fees up to $40 million.

However, these initial plans were not well received within the financial industry. Knight Capital, one of Wall Street’s largest trading firms that suffered losses during the IPO debacle, has blasted the compensation as paltry and has also hinted that it might also take legal action.

It has since been revealed that the compensation has been upped again to $62 million, and comment letters on the proposals are due to the Securities and Exchange Commission this week.

Nasdaq has made it clear to firms that suffered losses that its decision to offer compensation is voluntary and it isn’t obliged to reimburse for the full amount. It has also given strict parameters as to which type of orders can be reimbursed, and has said that firms that claim the compensation will lose their right to sue the exchange.

In other news, Knight Capital also recently suffered a trading glitch, which caused it to suffer losses of about £281 million. It was later revealed that the problem was triggered by the accidental reactivation of old computer software.

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